5 Common Misconceptions About the Chapter 11 Bankruptcy Process

The pandemic has hit many sectors of the economy pretty hard over the past couple of years, and we’ve seen an uptick in businesses filing for chapter 11 bankruptcy. It’s been awhile since we’ve seen this type of volume, and with a bankruptcy wave like this comes inevitable misunderstandings and misconceptions about how bankruptcy will affect a business, its customers and vendors.

Some folks think of bankruptcy as a quick-fix solution while others assume the worst. For business owners, that could mean missing out on a chance for debt relief. So let’s get to the bottom of some commonly held notions and find the truth amid the misconceptions. 

1. Bankruptcy Means Going Out of Business

We’re happy to report that no, filing for a chapter 11 bankruptcy is not necessarily an indicator that a business is going under. While liquidation is the aim with a chapter 7 business bankruptcy, a chapter 11 filing focuses instead on reorganization of debt and company restructuring. This process could include downsizing and some major shifts in everyday operations, but the goal is generally to keep the business open while paying down debt. One key change could be in ownership: the newly reorganized company will come under the purview of creditors and bondholders instead of shareholders, since they legally hold a stake to a larger claim of assets.

Of course it’s worth knowing that there are a lot of factors at play and not every business survives chapter 11 proceedings. But the intention is to remain open and operational. Some well-known, high-profile companies have come through just fine and gone on to thrive, so it definitely can be done successfully. A bankruptcy attorney can guide a business through the sometimes complicated process, and ensure that rights are protected.

2. Chapter 11 Is a One-Size Approach to Bankruptcy

A company in dire financial straits could be seeking the traditional chapter 11 process that begins with putting an end to possible litigation and collection actions via an automatic stay. It then continues with creditor negotiations and finishes with a confirmed plan of reorganization that spells out repayment. But not every company will go that route, and that’s okay––chapter 11 bankruptcy can be used strategically to reach a different outcome.

That could mean the sale of company assets without sights set on reorganization through a “section 363 sale.” Using this option, business owners could secure the court’s approval and bypass the potentially lengthy process of developing and confirming a reorganization plan. A buyer purchases the debtor’s assets and the proceeds from the sale pay creditor claims. When a company is looking to clear out their assets and reduce debt, a quick sale could be a way to bypass complicated restructuring and keep the company’s value intact. 

Other times just the threat of chapter 11 bankruptcy can serve as a negotiation tool for a company in financial distress. They may be able to buy time to handle reorganization outside of court, using options that could potentially be rejected in a bankruptcy proceeding.

3. Chapter 11 Bankruptcy Is Always a Long, Drawn-Out Process

It’s very true that plenty of companies have endured a chapter 11 process that seemed to be never ending. And on the opposite side of the spectrum are companies that wrapped things up in a day or less. These are the two extremes, but there is a potential shortcut of sorts. A good deal of the timing comes down to whether a detailed reorganization plan is drafted and negotiated after filing for bankruptcy, or if a prepackaged bankruptcy is employed. 

The goal of a prepackaged bankruptcy is to cut expenses and shorten bankruptcy turnaround. It involves negotiations with principal creditors and confirming of a reorganization plan and must be voted on by shareholders before any official petition is filed. It can then be approved by a court and the proceedings can be completed in record time. According to industry experts, this type of sped-up bankruptcy case makes up the majority of large chapter 11 filings. The total process may not be as fast as a day, but the typical three to nine months doesn’t sound too bad either.

4. Bankrupt Companies Have Lots of Cash Because They Aren’t Paying Creditors

It’s often true that companies opting for chapter 11 bankruptcy have been withholding payments to creditors, but this isn’t in order to pad their pockets. The liquid assets they do have on hand are generally being spent on day-to-day operations in an effort to keep doors open and the business afloat. Pre-petition debts––those that were accrued prior to the bankruptcy filing––might be owed to lenders, landlords, vendors, or other creditors. Bankruptcy puts an automatic pause on the ability for creditors to collect and harass, but it doesn’t cancel the debt.

On top of the normal operational costs that a business deals with, the bankruptcy process brings along its own set of bills and fees, both to lawyers and other professionals. With all these costs combined, most businesses cannot rely on cash flow alone and often find themselves in need of funds. This is true even if a company is working to make major cost-saving operational shifts. 

Debtor-in-possession (DIP) financing can be an invaluable resource for companies, allowing them to continue operations and reorganize with the eventual goal of paying off debts. DIP financing is a great tool to assure creditors that the business can honor agreements.

5. A Bankruptcy Will Make Customers and Vendors Run

There are some official steps that a business must take to begin the chapter 11 recovery process, and more often than not, customers won’t know it’s happening unless they’re very up on business news. That said, it really doesn’t stop them from buying a company’s products if they’re still being produced and sold. As far as customers are concerned, as long as they can get their favorite products or services, it’s just business as usual. 

Vendors and suppliers are much more likely to know once a company files for bankruptcy. If they are creditors they will receive official notifications about the case along with continued notices as things progress. Sometimes a contract is in place that obliges a vendor or supplier to stay in a relationship with the distressed company. But even those that do have options often decide to keep the business relationship going. If the company undergoing bankruptcy has adequate financing, vendors and suppliers need not worry about being paid, and the eventual repayment plan will also help them to recover pre-petition debts they’re owed.

Get Your Bankruptcy Questions Answered by an Ohio Bankruptcy Lawyer

As more businesses find themselves choosing between chapter 11 or liquidation, there will be countless bankruptcy questions that come up. Getting solid, fact-based information is vital to ensure that businesses don’t miss opportunities and don’t end up making decisions that force them to close their doors unnecessarily. 

If you are a business owner saddled with debt but not looking to shut down operations, it’s vital that you make the time to consult with an experienced bankruptcy attorney. Attorney James F. Hausen has handled over 2,000 cases and happily serves the Akron and Canton areas.

Contact Northeast Ohio Bankruptcy Attorneys today to set up a free consultation to discuss chapter 11 bankruptcy and find the best plan to help you repay your debts and keep your business moving forward.